When firms consider investing in a real asset project, what type of return are they primarily seeking?

• A. Nominal return, which ignores inflation and opportunity costs
• B. Social return, which measures benefits to society rather than the firm
• C. Economic return, which accounts for both explicit and implicit costs
• D. Accounting return, which only considers explicit costs

Answer: (C)

Verified step by step guidance

1. Understand the concept of returns in investment decisions: Firms evaluate returns to determine if an investment is worthwhile.
2. Recognize that nominal return ignores inflation and opportunity costs, so it does not fully capture the true profitability of a project.
3. Identify that social return focuses on benefits to society, which is important for public policy but not the primary concern for individual firms.
4. Learn that accounting return considers only explicit costs (actual monetary expenses) and ignores implicit costs such as opportunity costs.
5. Conclude that economic return is the most comprehensive measure for firms because it accounts for both explicit and implicit costs, reflecting the true profitability of the investment.